Having a background in sociology, philosophy, and economics, I'm going to try to give this blog a pretty broad scope. Going from finance and economics, to geopolitics and world news, to the occasional academic or theoretical post.
I was born in Buenos Aires, Argentina and live in New York, so we'll try to add that into it as well.
Even though I like Adam Smith, don't be surprised if a little Marx makes its way in there as well.
Follow me at @agufonte

Boeing In A Race Against Time As Entire 787 Dreamliner Fleet Grounded On Battery Issue

Boeing’s new year has gone from bad to worse as its 787 Dreamliners have suffered repeated malfunctions, causing the whole fleet to be grounded until its lithium ion batteries are deemed safe. The company’s reputation has taken a hit, dragging down the stock price which is now down more than 4% since Monday last week, yet the sell-off, and the public’s concern, may be overdone.

Analysts at RBC Capital Markets are confident a solution to the problem should come in weeks, and that passenger demand for the 787 won’t take a hit, while at UBS they’ve followed shipments of key parts to Boeing’s assembly plants and still see evidence that a ramp-up in production is more likely than not. Investors seem to agree on Thursday, helping the stock overcome early losses and rally back into positive territory.

The Dreamliner-gate has grown from a “tempest in a teapot,” as JPMorgan Chase’s Jamie Dimon would put it, to a full blown problem, causing the FAA and the EASA to ground all 787 units in their jurisdiction. A recent fire on a Japan Airlines Dreamliner and an emergency landing by an All Nippon Airways unit forced the two largest owners of 787s to suspend their flights. United Continental, Qatar Airways, Air India, Latam Airlines, Lot Polish Airlines, and Ethiopian Airlines have all halted their Dreamliner operations. Effectively, all operating 787s have been grounded, the first time a whole fleet is suspended since 1979 when inspectors found wing damage on Douglas DC-10s.

The main problem with the Dreamliners has been its electrical system, which has been under scrutiny for quite some time. Specifically, the 787s’ lithium-ion battery, which poses fire risk and have resulted in the “release of flammable electrolytes, heat damage, and smoke,” according to the FAA. In a statement, Boeing chief executive Jim McNerney said “the safety of passengers and crew members who fly aboard Boeing airplanes is our highest priority,” adding “Boeing is committed to supporting the FAA and finding answers as quickly as possible.”

The repeated incidents have spooked investors, causing several sell-offs over the past nine trading sessions. Yet the stock has been relatively resilient, remaining essentially flat from a year ago. Goldman Sachs, for example, withdrew Boeing from their conviction buy list, cutting their price target $8 to $98. The limited damage the stock price has suffered from these setbacks suggests the investing world sees the Dreamliner-gate as a temporary obstacle rather than a lethal blow.

“Indefinite grounding could prove short lived,” RBC’s equity research team said in a note on Thursday. “Given that the issue is now more than one week old we think Boeing and the FAA are likely to identify both cause and solution in the relatively near term – weeks versus months,” they added. Citing a 2011 issue with corrosion on gearboxes, RBC noted Rolls Royce, the provider, solved it in weeks. The problems, they argue, are analogous. Furthermore, the costs would be shared by key suppliers, such as Thales (power conversion prime), GS Yuasa (battery supplier), and Securaplane (a Meggitt subsidiary in charge of the battery charger), as their recent market sell-off indicates.

Beyond the grounding of the 787 fleet, Boeing is still marching on with its production plans. UBS’ research team has been monitoring Boeing’s 747 “Dreamlifter” fleet used to bring major parts to their Everett, Washington and Charleston, South Carolina plants, concluding the “planned ramp up in production [is] still more likely than not.” Boeing, they noted, will instruct its suppliers to proceed with the planned production increase, indicating the aircraft maker is confident it will overcome the recent suspension and subsequent grounding.

There are risks, though. While highly unlikely, a “serious, unfixable problem” in the 787’s design would mean “all bets are off in terms of the 787s 800+ backlog,” RBC’s team noted. At the same time, if airlines stop accepting delivery of the aircraft, it would drive a marked increase in inventory “and a headwind to cash for Boeing.”

Currently, news reports suggest the latter won’t be the case. American Airlines, Air China, Nippon Airways, Norwegian Air, and Japan Air have all affirmed they have no plans to cancel deliveries. Delta’s management noted they expect to receive deliveries of the 787 by 2020, while JetBlue and Southwest haven’t ordered any.

Investors appear as confidents as those airlines that continue to bank on Boeing. After taking a plunge, shares in the aircraft maker recovered on Thursday, trading up 1.3% to $75.28 by 2:49 PM in New York. Boeing, and the FAA, is now in a race against the clock, trying to salvage their reputation, their shareholders’ pocketbooks, and the airlines’ business before its too late.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.